How bold is the ECB?

The ECB will cut its key interest rates next Thursday.

Dr. Marco Wagner

Commerzbank Economic Research

May 31 2024

After that, we expect quarterly rate cuts of 25 basis points each until a deposit rate of 3% is reached in spring 2025. The improving economy and a core inflation rate that remains stubbornly above its target due to the continued strong rise in wages should make it difficult for the ECB to cut interest rates further.

Juni interest rate cut is a done deal

The time is ripe for a first rate cut next Thursday, say almost all ECB Governing Council members – even those from the hawkish camp. It does not matter that wages in the eurozone rose somewhat more strongly again in the first quarter (4.7%, after 4.3% in the fourth quarter of 2023). On the contrary, the officials hint at the ECB's experimental wage indicators (wage tracker) which, in their opinion, points to decreasing wage pressure. The central bankers see their projections of declining inflation confirmed. The ECB experts are only likely to publish a slightly higher forecast for core inflation for 2024 on Thursday, as the data at the start of the year was slightly higher than expected. For the same reason, they are likely to forecast slightly higher growth for 2024. The projections for 2025/26 should to remain unchanged, though.

The central bankers are likely to cut their key interest rates by 25 basis points next week. Even monetary policy doves such as ECB Vice President Luis de Guindos expect a "prudent approach, which would argue in favor of a reduction of 25bp." Moreover, this is in line with market expectations and expert forecasts, and the ECB is unlikely to surprise with a more significant rate cut.

The central bankers will hardly provide any guidance for the subsequent interest rate path next week. Instead, the ECB is likely to continue to state that interest rate decisions "will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, and we are not pre-committing to a particular rate path."

No rate cut in July ...

There is certainly a risk that the numerically superior doves in the ECB Governing Council will seize the opportunity and push for a second interest rate cut in July. If the inflation figures in May and June turn out to be low, this would not be out of the question. The doves could argue that, despite a first rate cut in June, real interest rates are unlikely to fall in view of the downward trend in inflation and that monetary policy will therefore remain restrictive. However, some Council members, such as Estonian Madis Müller, have now explicitly spoken out against a rapid further rate cut in July; other Council members – even from the dovish camp, such as the Spaniard Pablo Hernández de Cos – have spoken of proceeding with caution after the June move. We therefore still do not expect a rate cut in July.